| Chapter: | Reading | Topic |
Which of the following costs is deducted from revenues of a manufacturing company in order to determine gross margin, but not deducted from revenues to determine contribution margin?
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To assist management in financial planning, control, and analysis, companies often use specialized budgets. One of the most common is the cash budget, part of the master budget. A cash budget projects sources and uses of cash. Should a shortage of cash be projected, management will have sufficient time to find alternative sources of funding.
Inventory purchases are a component of the cash budget. To determine budgeted cash payments related to inventory purchases, follow these steps:
| Inventory purchases: | |
| Desired ending inventory | $ 42,000 |
| Plus: COGS (ie, inventory that was sold) | 300,000 |
| Total inventory required for the year | 342,000 |
| Less: Beginning inventory (ie, already on hand) | 30,000 |
| Inventory to be purchased in Year 5 | $312,000 |
| Inventory purchases per month (divide by 12) | $ 26,000 |
| Cash payments: | |
| Beginning accounts payable | $ 20,000 |
| Plus: Monthly inventory payments for 11 months at $26,000 | 286,000 |
| Budgeted cash payments | $306,000 |
(Choice A) An amount of $286,000 is the monthly inventory payment (assuming 11 months of payments).
(Choice B) COGS, not inventory payments, is $300,000.
(Choice D) An amount of $312,000 is the inventory that needs to be purchased for Year 5.
Things to remember:
The cash budget is one of the master budget components. One of the more significant amounts on the cash budget is payments for inventory purchases. Purchases are desired ending inventory plus COGS less beginning inventory. Cash payments may have a time lag (eg, payment ocurring one month after a purchase)
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